Investors are increasingly interested in a rapidly-growing investment approach that considers their values and beliefs when selecting and managing their portfolio. Consideration of environmental, social and governance (ESG) issues has captured the attention of institutional investors worldwide… but understanding what to do about them is more challenging.
ESG investing refers to aspects investors may consider when evaluating a firm’s sustainable or ethical practices. These aspects also present opportunities and risks that can affect a company’s financial performance. Some of the key environmental, social and governance issues are stated in Table 1.
ESG investing has expanded dramatically. It grew by 34% to $30.7 trillion between 2016 and 2018, according to the Global Sustainable Investment Alliance. ESG investments now amount to about a quarter of professionally managed assets globally.1
Today, as ESG investing moves into the mainstream, a baseline understanding of the value that ESG brings to investing is important for any institutional asset owner.
Can ESG Investing Impact Performance?
Academics and practitioners have been examining the impact of ESG on corporate performance since the 1970s. Over 2,000 studies on the topic exist. Unfortunately, it’s challenging to find supporting or opposing evidence to answer this question definitively because the studies all have varying levels of scope, different methodologies, unique data sets, different time periods, etc.
In 2015, a team of researchers from Deutsche Bank’s Asset and Wealth Management and the University of Hamburg attempted to aggregate the evidence from these studies. They concluded that “the business case for ESG investing is empirically very well founded.”2 They state that 90% of the 2,200 individual studies they examined found a nonnegative relationship between ESG criteria and corporate financial performance. These exhaustive efforts notwithstanding, institutional investors should recognize that such analyses are never an exact science and are plagued with data shortcomings and multiple interpretations.
Accommodating moderate ESG considerations into a diversified investment portfolio without negatively affecting performance is increasingly practical. Moreover, the increasing market adoption of ESG considerations could trigger a virtuous cycle of suppressing the potential cost and amplifying the potential benefit of incorporating ESG aspects into any investment process.
Ultimately, investors embracing ESG investing are considering three dimensions: risk, return and values. ESG investing must balance the maximization of risk-adjusted returns with the pursuit of potentially non-financial motives.
As a wave of new entrants engages in ESG investing, an opportunity exists for asset managers to offer better tools, information and education on ESG investing.
1 Professionally-managed assets as measured by the Boston Consulting Group. Fages, Renaud, Brent Beardsley, Ingmar Brömstrup, Hélène Donnadieu, Benoît Macé, Neil Pardasani, Liska Schmitz, Ben Sheridan, Giambattista Taglioni, and Qin Xu, 2018. Global Asset Management 2018: The Digital Metamorphosis. Available at https://www.bcg. com/en-us/publications/2018/global-asset-management-2018-digital-metamorphosis.aspx.
2 Friede, G., Busch, T., & Bassen, A. (2015). ESG and financial performance: Aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance & Investment, 5(4), 210-233. doi:10.1080/20430795.2015.1118917.
This information is intended to be educational and is not tailored to the investment needs of any specific investor, nor is it an endorsement or recommendation for any particular security or trading strategy. You should not rely on this information as the primary basis for your investment, financial, or tax planning decisions. Past performance cannot guarantee future results. Investing involves risk, including the possible loss of principal and fluctuation of value. All content is presented as of the date published or indicated only, and may be superseded by subsequent market events or for other reasons.